Inherited Property Tax Guide for Accidental Landlords UK 2025

Understanding the "Accidental Landlord" Tax Position

"Accidental landlords" are people who become property owners and landlords through circumstance rather than intentional investment—most commonly through inheritance. Unlike professional landlords who plan for tax implications, accidental landlords suddenly face complex tax obligations without preparation.

This guide assumes you've inherited property and are either renting it out or considering doing so. Your tax position differs significantly from someone who purchased buy-to-let property, primarily due to your inherited property's "stepped-up basis" for capital gains purposes and the fact that you didn't choose this investment.

Inheritance Tax: What the Estate Paid

Before you inherited the property, the estate likely dealt with inheritance tax. Understanding what happened helps you appreciate your current tax position.

IHT Nil-Rate Bands and Thresholds

For deaths in 2024/25 tax year:

• Standard nil-rate band: £325,000 per person
• Residence nil-rate band: £175,000 per person when main residence passes to direct descendants
• Combined for individuals: Up to £500,000 tax-free
• Combined for married couples: Up to £1,000,000 tax-free when one spouse dies after the other

These thresholds are frozen until at least April 2028, meaning inflation and property appreciation push more estates into IHT territory each year.

How IHT Affected Your Inheritance

If the estate exceeded applicable thresholds, it paid 40% IHT on the excess. This doesn't directly create tax liability for you as beneficiary, but it reduced the value you inherited.

Example:

Parent died leaving estate worth £800,000 (£600,000 property + £200,000 cash) to two children. Property was their main residence.

Available nil-rate band: £325,000
Residence nil-rate band: £175,000
Total tax-free: £500,000
Taxable estate: £300,000
IHT at 40%: £120,000

Estate had to pay £120,000 IHT before distributing to beneficiaries. Each child received approximately £340,000 (half of £680,000 after tax and costs), not the £400,000 they might have expected.

Can You Reduce IHT Retrospectively?

Generally no—IHT is calculated at death and cannot be changed. However, one important relief exists:

Sale at loss relief: If inherited property is sold within four years of death for less than probate value, you can reclaim some IHT. The estate's IHT bill is recalculated using actual sale price instead of probate value, and HMRC refunds the difference.

Example: Property valued at £400,000 at death but sold for £350,000 within four years. Estate paid IHT on £400,000 value. After sale, you claim to recalculate IHT based on £350,000, receiving refund of IHT paid on the £50,000 difference (£20,000 at 40% rate).

Capital Gains Tax When Selling Inherited Property

CGT is likely your largest tax concern as accidental landlord. Understanding how it applies to inherited property is crucial for tax planning.

The Stepped-Up Basis Advantage

When you inherit property, your "base cost" for CGT purposes is the probate value (market value at date of death), not what the deceased originally paid. This "stepped-up basis" eliminates CGT on all appreciation during the deceased's ownership.

Example illustrating stepped-up basis:

Deceased bought property in 2005 for £180,000
Property worth £420,000 at death in 2024
You sell in 2025 for £445,000

Your capital gain: £445,000 (sale price) - £420,000 (stepped-up basis) = £25,000
Not £445,000 - £180,000 = £265,000

This stepped-up basis saved you CGT on £240,000 of appreciation—a tax saving of approximately £57,600 at higher-rate.

CGT Rates and Allowances 2024/25

• Annual CGT exemption: £3,000 per person (reduced from £12,300 in 2022/23)
• CGT on residential property: 18% for basic-rate taxpayers, 24% for higher-rate taxpayers
• Tax-free if it's your only/main residence: Principal Private Residence Relief may apply

Calculating Your CGT Liability

Worked example:

Probate value: £350,000
Sale price: £385,000
Gross gain: £35,000

Deduct allowable costs:
Estate agent fees: £5,400
Legal fees: £1,800
Total allowable costs: £7,200

Net gain: £35,000 - £7,200 = £27,800
Less annual exemption: £27,800 - £3,000 = £24,800
CGT at 24% (higher-rate taxpayer): £5,952

When Is CGT Due and How to Report

Reporting deadline: You must report property sale to HMRC within 60 days of completion using the online Capital Gains Tax on UK Property Account service, even if no tax is due.

Payment deadline: CGT must be paid within 60 days of completion. This is unusual—most taxes are paid months after the transaction, but property CGT has accelerated payment deadline.

Penalties for late reporting: Minimum £100 penalty for missing 60-day deadline, increasing for longer delays.

Strategies to Minimize CGT

1. Sell quickly after inheritance

CGT applies only to appreciation after death. Selling during probate or within 12 months limits appreciation period, reducing potential gain. Properties that appreciate 5% annually mean each year of delay adds 5% to your taxable gain.

2. Utilize multiple beneficiaries' allowances

If multiple beneficiaries inherit jointly, each has £3,000 annual exemption. Two siblings have £6,000 combined allowance, three have £9,000. Ensure property is legally transferred to all beneficiaries before sale to access all allowances.

3. Make it your main residence (even temporarily)

If you occupy inherited property as your only/main residence for any period, you may qualify for Principal Private Residence Relief (PPR). The relief applies for the period of occupation plus the final 9 months of ownership (which are always exempt).

Example: You inherit property worth £300,000, live in it as main residence for 2 years, then sell for £340,000 three years after inheritance. Gain is £40,000. PPR covers 2 years occupation + 9 months final period = 2.75 years out of 3 years ownership = 92% exempt. Only 8% of gain (£3,200) is taxable, well within your £3,000 allowance.

4. Offset with capital losses

Capital losses from other disposals (stocks, other property) can offset gains on inherited property. If you have unused capital losses from previous years, inherited property sale may be good opportunity to utilize them.

5. Time sale across tax years

Your £3,000 allowance renews on 6 April each year. If selling multiple inherited properties or expecting other capital gains, timing sales to utilize allowances across multiple tax years reduces total CGT.

Income Tax on Rental Income

If you're renting inherited property rather than selling, rental income creates ongoing income tax obligations.

What Counts as Rental Income

All money you receive from tenants is rental income:

• Monthly rent payments
• Service charges you receive then pay onward (if you keep any portion)
• Payments for use of furniture
• Fees for additional services (parking, storage, etc.)
• Tenant payments for repairs (beyond normal deposit deductions)

Calculating Taxable Rental Profit

Allowable expenses you can deduct:

• Letting agent fees and property management costs
• Buildings and contents insurance
• Utility bills you pay (water, gas, electricity during void periods or if included in rent)
• Council tax (if you pay it rather than tenant)
• Ground rent and service charges
• Repairs and maintenance (not improvements—see below)
• Professional fees (accountant, legal fees for tenant issues)
• Cost of safety certificates (gas, electrical, EPC)
• Travel costs for property management visits
• Direct costs of finding tenants (advertising, referencing)

NOT allowable (common mistakes):

• Capital improvements (new kitchen, extension, loft conversion)—these increase property value
• Your own time managing property (labor is not deductible)
• Initial setup costs before property first let (carpet/paint before first tenant)
• Mortgage interest (see Section 24 below)

The Repair vs Improvement Distinction

This distinction causes enormous confusion but critically affects tax liability.

Repairs (deductible): Restoring worn or broken items to original condition. Examples: fixing broken boiler, replacing like-for-like broken windows, repairing roof leak, repainting in same color.

Improvements (not deductible): Upgrading beyond original standard or adding new features. Examples: replacing functional kitchen with luxury kitchen, adding ensuite bathroom, installing double glazing where none existed, converting garage to living space.

Grey areas: Replacing broken single-glazed windows with double-glazing (improvement element), replacing old boiler with more efficient model (part repair, part improvement). HMRC guidance suggests apportioning costs in ambiguous cases.

Section 24: The Mortgage Interest Restriction

If inherited property has a mortgage (from equity release, or you took mortgage to buy out siblings), Section 24 tax changes dramatically affect profitability.

What Section 24 Changed

Before 2017, landlords deducted full mortgage interest from rental income before calculating tax. From April 2020, mortgage interest is no longer deductible—instead, you receive only a 20% tax credit.

Impact comparison:

Who Section 24 Affects Most

Section 24 impact varies dramatically by taxpayer:

• Basic-rate taxpayers: Minimal impact—20% tax credit = 20% tax rate, effectively neutral
• Higher-rate taxpayers (40%): Severe impact—losing full 40% deduction and receiving only 20% credit
• Additional-rate taxpayers (45%): Catastrophic impact—losing 45% deduction for 20% credit
• Properties with large mortgages: High interest costs magnify Section 24 impact
• Properties near break-even: Can become loss-making after tax despite positive pre-tax cash flow

Section 24 Mitigation Strategies

1. Pay down mortgage rapidly

Reducing mortgage balance reduces interest payments, minimising Section 24 impact. Using rental income to overpay mortgage rather than withdrawing profit improves long-term position.

2. Consider incorporating (advanced)

Limited companies can still deduct full mortgage interest. Transferring property to limited company avoids Section 24 but triggers immediate CGT and stamp duty on transfer, plus ongoing corporation tax and complexity. Only worthwhile for large portfolios or very high earners. Seek professional advice before considering.

3. Keep property mortgage-free

If inheriting property with no mortgage, avoid taking mortgage against it if possible. The tax efficiency of mortgage interest has disappeared for higher-rate taxpayers.

Stamp Duty Land Tax on Sibling Buyouts

If you buy out siblings' shares in jointly inherited property, stamp duty may apply.

When SDLT Applies to Buyouts

Stamp duty applies if the total "consideration" (what you pay to siblings plus your share of any mortgage you're assuming) exceeds the relevant threshold.

SDLT thresholds 2024/25:

• If property will be your main residence: No SDLT up to £250,000, then standard residential rates
• If you already own property (not main residence): No SDLT up to £250,000, then higher rates (additional 3% surcharge)

Example calculation:

Property worth £360,000, inherited by three siblings equally (£120,000 each). You buy out two siblings for £240,000. Property is mortgage-free and will be your main residence.

Total consideration: £240,000 (below £250,000 threshold)
SDLT due: £0

Example 2 with mortgage:

Same scenario but property has £90,000 mortgage. You pay siblings £180,000 cash (£90,000 each) and assume the £90,000 mortgage.

Total consideration: £180,000 (cash to siblings) + £90,000 (mortgage assumed) = £270,000
SDLT on £270,000 (main residence): 0% on first £250,000, 5% on £20,000 = £1,000
SDLT due: £1,000

Record-Keeping Requirements

Proper records are essential for accurate tax reporting and defending position if HMRC investigates.

Records to Keep for Rental Income

• Income records: All rent received, including dates and amounts. Bank statements showing rental deposits
• Expense receipts: Every invoice, receipt, and proof of payment for all deductible expenses
• Mileage logs: If claiming travel to property, detailed records of dates, mileage, and purpose
• Tenancy agreements: All ASTs and related documentation
• Safety certificates: Gas, electrical, EPC certificates and inspection reports
• Agent correspondence: Emails and reports from letting agents documenting management activities

Records to Keep for Capital Gains

• Probate valuation: RICS valuation or three estate agent valuations used for probate—this is your base cost
• Improvement costs: Invoices for any capital improvements (not repairs) made before sale
• Sale documentation: Sale contract, completion statement, estate agent and solicitor invoices
• Occupancy records: If claiming PPR, evidence of when property was your main residence

How Long to Keep Records

Rental income records: Minimum 5 years from 31 January following the tax year. Example: For 2024/25 tax year, keep until at least 31 January 2031.

Capital gains records: Keep until at least 6 years after you dispose of the property.

Self Assessment and Reporting Requirements

Do You Need to Register for Self Assessment?

You must register for Self Assessment if:

• Your rental income (before expenses) exceeds £1,000 per year (the property allowance)
• You have capital gains above £3,000 annual exemption
• You're not already in Self Assessment for other reasons

Register by 5 October following the tax year in which you first received rental income or made a capital gain. For 2024/25 tax year (ending 5 April 2025), register by 5 October 2025.

Completing Your Tax Return

For rental income: Complete the SA105 UK Property supplementary page. This requires:

• Total rental income received
• Breakdown of all expenses by category
• Mortgage interest amount (for 20% tax credit calculation)
• Details of any void periods

For capital gains: You must report property sales within 60 days using the separate CGT Property Account, then also include on your SA108 Capital Gains supplementary page when filing annual return.

Payment Deadlines

• CGT on property sales: Within 60 days of completion (accelerated deadline)
• Income tax on rental profits: 31 January following end of tax year (e.g., 31 January 2026 for 2024/25 tax year)
• Payments on account: If tax bill exceeds £1,000, you'll make advance payments for following year (31 January and 31 July)

Common Tax Mistakes Accidental Landlords Make

Mistake 1: Not Reporting Rental Income Under £1,000

Some believe the £1,000 property allowance means rental income below £1,000 doesn't need reporting. Wrong. The allowance covers expenses up to £1,000—you still must report the income. If rental income exceeds £1,000 gross, you must register for Self Assessment and report it.

Mistake 2: Deducting Improvement Costs as Repairs

Claiming new kitchen, bathroom upgrades, or extensions as deductible repairs overstates deductions and risks HMRC penalties. Improvements are only deductible against future CGT, not against rental income. When uncertain, seek professional advice on classification.

Mistake 3: Missing the 60-Day CGT Reporting Deadline

Many landlords assume they report CGT on annual return the following January. Wrong—property CGT must be reported and paid within 60 days of sale completion. Penalties for late reporting start at £100 minimum and increase with delay.

Mistake 4: Not Keeping Adequate Records

Without receipts and documentation, you cannot prove deductible expenses. HMRC can disallow claimed expenses during investigations if you lack supporting evidence, leading to higher tax bills plus interest and penalties.

Mistake 5: Ignoring Probate Valuation Accuracy

Probate valuation becomes your CGT base cost. Undervaluing property at probate (to minimise IHT) creates larger future CGT liability when selling. The combined tax burden (IHT + CGT) may be higher than if you'd used accurate probate valuation. Get professional RICS valuation to establish defensible base cost.

When to Seek Professional Tax Advice

Consider engaging tax accountant or adviser when:

• Property value exceeds £400,000 (larger potential tax liabilities)
• Multiple beneficiaries with different tax positions (complex optimisation)
• You're higher-rate taxpayer with mortgaged property (Section 24 severely affects you)
• Considering buyout structure or timing of sale (tax planning opportunities)
• Inheriting multiple properties or complex estate
• Uncertainty about repair vs improvement classification
• Considering incorporation or other advanced structures

Professional fees (£500-£2,000 for annual tax return preparation, £150-£300/hour for specific advice) are tax-deductible against rental income and often save multiples of their cost through optimised tax positions.

Frequently Asked Questions